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Americans $1 Trillion in Credit Card Debt

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By Jose Garcia

At the beginning of the new year the Federal Reserve announced that in November of 2008 credit card debt totaled $973.5 billion--a decrease of 3.4 percent from October 2008. While that may sound like some good news for consumers, the numbers fail to reflect the debt that has already been written off the books and landed into the debt collection market. The third quarter of 2008 reported the highest credit card write-offs since 2002. While not all this debt will be passed onto debt collectors, enough of it will be snapped up by debt junk buyers to expose consumers to the unscrupulous and minimally regulated world of debt collection.

Credit card companies sell their bad debt--debt they have already written off the books--to debt buyers for just pennies on the dollar. The debt buyers then break up the debt into smaller chunks and resell them to collection agencies who try to collect on the old debts for more than they paid.

The growing profitability from debt collection--from the publicly traded firms who buy debt to the local collection agents who hound people at home--has resulted in the creation of an overly aggressive industry with questionable business tactics. The latest numbers from the Federal Trade Commission (FTC) show that in 2007 consumers filed 70,951 complaints against debt collectors up from 13,950 in 2000. The bulk of the complaints were for the misrepresentation of the amount, nature or legal status of the debt by demanding a larger payment than was permitted by law--a violation of the Fair Debt Collection Practices Act (FDCPA).

Debt collectors are not just interrupting families' dinner anymore. Stories abound of calls made to family members, neighbors and even employers in an attempt to track down their target. Worse are the stories of Americans who have been harassed for the repayment of debt that they never even owed.

Consumers have fallen victim to these tactics because consumer protections from debt collection are severely limited. According to a recent article in the New York Times, changes to the debt repayment industry should begin before the collection process. Rather than the current model of individually working with creditors, Financial Services Roundtable, one of the industry's biggest lobbyists, and the Consumer Federation of America recently proposed a credit card loan modification program. As part of the plan, lenders would have to forgive 40 percent of what was owed by the borrower over five years. The benefit to the industry is less to write off while consumers would be able to pay off their debt.

The hard economic times befalling American families calls for a rethinking of fearless competition and greed as standards for determine economic policy. As we just witnessed in the aftermath of the mortgage debacle, little regard for the consumer is an unsustainable guiding principle both for families and the economy. Reacting to this new economic reality, credit card companies have begun to make it easier for borrowers to repay their debt. But in a deregulated market, such as the one we still have today, they are free to do as they please in the realm of debt repayment. If we should walk away with anything from the economic bust of 2008 it is that consumer protections should not only be a priority for regulators but consumer protection should be a guiding principle for market behavior and corporate pricing.

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